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Late Tuesday Fitch warned that it would downgrade its U.S. credit rating to "RD," or restricted default, if Congress failed to come up with a debt ceiling deal before the deadline of midnight tonight.
But Fitch added that just any deal isn't going to cut it.
In its press release, the credit rating agency said that the "manner and duration of the agreement and the perceived risk of a similar episode occurring in the future" would also factor into its decision to downgrade its AAA rating on U.S. debt.
In other words, Fitch was saying that if the debt ceiling deal resolves little except postponing the problem for another few months, it would seriously consider downgrading the United States anyway.
Remember, the Standard & Poor's downgrade in 2011 happened after that edition of the debt ceiling crisis was resolved, so Fitch has a precedent to follow.
The debt ceiling deal passed yesterday provides enough funds to end the government shutdown until Jan. 15 while extending the debt limit to Feb. 7 – less than four months away. It also requires the Democrats and Republicans in Congress to meet to discuss their budget differences before then.
That might not be good enough for Fitch.
Fitch says it has had enough of the chaotic approach to budget issues in Washington, which has been the norm for several years now.
Among the factors Fitch said it would consider going forward is "the impact of the debt ceiling brinkmanship and government shutdown on our assessment of the effectiveness of government and political institutions, the coherence and credibility of economic policy, the potential long-term impact on the U.S. sovereign's cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth."
Fitch added that debt ceiling deal negotiations in Washington risk undermining the confidence in the U.S. dollar as the global reserve currency by casting doubt over the full faith and credit of the United States.
"This 'faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns," wrote Fitch.
Translation: Don't be surprised if the net result of a lame debt ceiling deal is a Fitch downgrade within the next couple of weeks.
So what kind of impact might a Fitch downgrade have on the U.S. credit markets, or, for that matter, stocks and other investments?
For answers to these questions, we turn to Money Morning Chief Investment Strategist Keith Fitz-Gerald…